Question

You must install $1 million of new machinery in your plant. You can obtain a bank loan for 100% of the required amount. Alternatively, you lease the machinery. The following facts apply:

1. The equipment falls into the 3-year MACRS class

2. Estimated maintenance expenses are $50,000 per year

3. Your tax rate is 34%

4. The bank loan will be paid in three equal installments at the end of each year. The interest rate on the loan is 14%

5. The lease call for payments of $320,000 at the end of each year for three years.

6. The lessee pays insurance, property taxes and maintenance.

7. If you lease, you believe you will need to acquire the machinery at the end of the lease at its fair market value. Your best guess is that the fair market value will be $200,000. Obviously, it could be a higher or lower.

What should you do? Why?

Answer 1

Date Page Loon Option L The loan amount is repayable together with the interest at the rate of 147. 14% on loan amount and is repayable in equal installments at the end of each year. The PVAF at the rate of 14% for 3 years is 2.3216 Annual Payment = $ 1000000 430 737 (rounded) 2.3216 year Schedule of Debt Repayment Total Interest Principal Payment 430737 140000 290737 430737 . 99297 331440 430737 52914 377823 Principal Amount outstanding 709263 377823 I Schedule of Dapreciation MAIRS 3-year class Year Opening Balance 1000000 666700 3 370352 3-year MACRS 33.33% 44.45% Depreciation . 333300 296348 Closing Balance 666700 370352 315503 14.81% 54849 Note- - Interest rate Interest rate 149 14% use as a Discount We rate.